Tariffs and Price Changes
I have been looking at the data recently to find economic series that would quickly reflect the impact of rising tariffs on the consumer.
One is Retail Sales: GAFO. Think of it as department store type merchandise — goods excluding autos, food and energy. It is reported every month in both the Census retail sales press release and in the BEA measures of retail sales they compile in putting together personal spending and GDP. I have long preferred the BEA data because it provides very detailed measures of retail sales and real growth. Moreover, the practice of some to deflate the Census retail sales data with the CPI overstates retail price increases and under states real sales growth.As the chart shows price changes in GAFO sales moves very closely with prices of consumer goods imports excluding autos, food and fuels.
However, there is a problem with using the price index for imports as a measure of the impact of tariffs. It is a measure of prices FoB, or freight on board. So it does not include tariffs that are added as the merchandise moves through customs. In the current environment importers reaction to tariffs could show up here. One, if China absorbs some of the price increase while consumers would see higher import prices, this measure of import prices would actually fall as it shows prices China receives. Alternatively, if production is shifted to other countries their prices could be higher that the original Chinese price but less than the new Chinese price including the tariff. In this case, this measure of import prices would rise. So we do not know ahead of time how this price index will change.
Just a footnote, GAFO is about a quarter of all retail sales and this measure of consumer imports is also about a quarter of all imports.
Correction: You mean the Domestic exporters from China absorb some of the costs. China isn’t absorbing anything.
Typically the manufacturer pay the freight to the dock unless other arrangements are made such as XWorks. So yes the Chinese are paying something to get the container to the dock where ownership transfers once on board.
run, i read Bert’s comment to mean that China (the country) isn’t being impacted by the tariffs, just some Chinese businesses are…i’d agree with that…Trump makes it sound like the tariffs are being levied on Mao himself…
One of our key suppliers makes their products in China. Without naming names, lets accept that these products are very, very expensive. We have just notified every potential customer that is holding an existing quote that the tariffs will increase over the tariffs we already quoted them. The tariff is either absorbed into the cost to us or it is a line item charge. When the former, the list price is raised giving us a higher cost basis. When we mark it up, that means we have to mark up the tariff as well. In the latter case, the tariff is spelled out below the line. In both cases, the customer pays the tariff.
No, you do not have to add a markup to the tariff. You can just add the increase to the price to cover the cost and show your customer you are a good supplier to them who is not taking advantage. Furthermore if there is no mention of out of your control happening which causes your cost to increase, they could hold you to their purchase order and your contract with them. Try to cancel it and they could have remedy in court just the same as you could have remedy in court for a cancellation during their spelled out lead time in the contract.
Run…its actually a matter of cogs on our books. The tariffs charged to us by our suppliers are part of our receivables to that supplier. If we do not mark it up, it depresses our gross margin percentages by that amount. For instance, say the true cost of something is 1000, tariff is another 100. if we mark up the 1000 by our standard margin rate, when the receivable hits our books, the true cost to us is 1100 not 1000. In most cases, our suppliers included the tariff in list price increases to us and buried the tariffs into our cost. That means we marked up the true cost along with the built in tariff and the customer ends up paying the tariff plus our mark up on the combined new cost. Its a frigging mess but at least I can tell myself that my client base likely voted for Trump en masse so you get what you paid for in my book.